Loren Steffy: Deal's done. Now comes the hard part

Commentary

Published 5:30 am, Sunday, May 2, 2010

Now that Continental Airlines CEO Jeff Smisek has coordinated his carrier’s sale to United Airlines, he faces a far more daunting task: making it work.

The combined airline, which will retain the United name, is the 20th merger or acquisition of another carrier by a major airline since Congress deregulated the industry in 1978. Of those deals, only two have gone smoothly. The rest have been mired in labor disputes, runaway costs and embittered customers.

A year from now, the airline that was Continental could be replaced by a crippled, bumbling money-losing carrier known for surly employees, lost bags and canceled flights.

Smisek, of course, is hoping to mirror one of those two merger successes, the 2008 combination of Delta Air Lines and Northwest Airlines, which had few labor issues and compatible corporate cultures.

If he's going to beat the odds, he's going to have to skirt the pitfalls that have caused so many before him to stumble.

Customers' good will

“In any merger of two large airlines, problems are typically labor and fleet issues, and then culture,” said Michael Cox, managing director of the Seabury Group, which advises airlines on restructuring and has advised United on fleet issues.

In the case of United and Continental case, the problems may be even greater. The airline risks alienating the customer good will and community support it's fostered, especially if the merger results in job losses, decreased service, higher fares or fees or changes to the frequent flier program.

Since emerging from its second bankruptcy in the mid-1990s, Continental has focused on customer satisfaction. Until Smisek took over in January, it was the last major carrier still offering free in-flight meals in coach and it maintained one of the industry's newest fleets. That gave it top scores in customer satisfaction surveys.

Under former CEO Gordon Bethune, the airline embraced a collaborative culture, unique among the so-called legacy carriers, that still permeates it.

United, which endured a prolonged recent bankruptcy and has been marred by cost cutting, enjoys less customer satisfaction. Smisek's challenge is instilling Continental's culture at United, which has about 5,000 more employees. That won't be easy from his new digs in Chicago.

Labor issues

Continental also has, at least as airlines go, favorable labor relations. United, by contrast, has been racked by labor strife.

Labor is a perennial stumbling block in airline mergers. Unions squabble over who will represent which work groups, and how seniority will be meted out among the combining rosters.

The Delta acquisition of Northwest succeeded largely because the same union represented pilots at both carriers. Delta had no other organized work groups.

More for pilots' pay?

Continental and United pilots share a union, too, but Continental's pilots are paid better. That means United's pilots will expect a raise out of this deal, and they'll probably get it. So much for lowering costs.

Meanwhile, the two carriers' flight attendants and ramp workers are represented by different unions, each of whom wants a chance to increase membership.

“If a merger is actually going to go forward, we'll make sure all flight attendants are represented by the Association of Flight Attendants,” spokesman Sara Nelson told the Chronicle last week. Her union represents United attendants.

The International Association of Machinists, which represents Continental's attendants, hasn't taken a position on the deal. Similarly, the IAM represents United ramp workers, who are members of the Teamsters at Continental.

A mixed fleet

Then there's the planes themselves.

Continental operates an all-Boeing fleet, while United is a mixture of Boeing and Airbus. In all, United has more than 60 planes on order with Airbus and options for 50 more. Even if those orders are scrapped, a “mixed” fleet means higher maintenance costs, and different aircraft types add to difficulties in integrating pilot rosters.

Smisek also will have to meld the massive information technology systems that handle operational, maintenance and customer data at both carriers. Again, Delta had an advantage two years ago. It and Northwest shared the same reservation system. Continental and United don't.

“The complexity and difficulty of integrating two airlines' information technology systems cannot be understated,” said Michael Denis, a principal with Aviation Wikinomics, a technology consultant.

Smisek may have gotten the deal done, but his to-do list just got a lot bigger — and a lot more difficult.